Tactile Systems Technology, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 26, 2018. The company develops and sells home-use medical devices, primarily for lymphedema and chronic venous insufficiency. Its direct-to-patient and provider model includes sales, reimbursement support and patient training.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $109.3 million | $84.5 million | +29% |
| Gross profit / margin | $80.3 million / 73% | $61.6 million / 73% | Gross profit +30%; margin unchanged |
| Operating expenses | $76.4 million | $57.3 million | +33% |
| Operating income / margin | $3.9 million / 3% | $4.3 million / 5% | Operating income -9% |
| Net income | $5.9 million | $2.9 million | +103% |
| Diluted EPS | $0.31 | $0.15 | More than doubled |
| Operating cash flow | $4.2 million | $7.0 million | Decreased |
- Flexitouch revenue was $100.3 million, up 37%, and represented 92% of revenue, versus 87% in 2016. Entre and Actitouch combined revenue fell 20% to $8.9 million.
- Sales and marketing expense rose 31% to $44.4 million; reimbursement, general and administrative expense rose 41% to $26.9 million. Management attributed increases largely to staffing, variable compensation, patient training and public-company costs.
- The FY 2017 net income increase included a $1.7 million income tax benefit, versus $1.4 million tax expense in 2016. The benefit reflected share-based compensation tax effects, partly offset by approximately $1.2 million of tax expense from revaluing deferred tax balances after the Tax Cuts and Jobs Act.
- At year-end, cash and cash equivalents were $24.0 million and marketable securities were $19.9 million, totaling $43.9 million, compared with $41.7 million a year earlier. Working capital was $62.4 million; total debt was zero. The $2.0 million bank line expired in May 2017 with no balance outstanding.
- Current assets were $76.9 million and current liabilities were $14.5 million. Accounts receivable, net, was $17.6 million, plus $2.7 million of long-term Medicare receivables. Inventory rose to $11.0 million from $6.6 million.
- Investing cash outflow was $14.0 million, mainly purchases of marketable securities and $3.7 million of property, equipment and tooling. Financing cash inflow was $3.1 million, principally employee stock purchase plan proceeds. The 2017 secondary offering was by selling stockholders; the company received no proceeds.
Changes, outlook and material risks
- Revenue growth was driven by Flexitouch sales, an expanded sales force, greater clinician and patient awareness, and additional payer coverage. Growth was partly offset by lower Entre and Actitouch sales.
- Management expects revenue to increase through continued market development, commercial expansion, reimbursement efforts and product development, but anticipates ongoing payer pricing pressure and a slight near-term decline in gross margin. The filing gives no specific numerical revenue or earnings guidance.
- Flexitouch Plus received FDA 510(k) clearance in June 2017. Management planned to introduce new garments and controller improvements in the first half of 2018.
- Revenue is seasonal: the first quarter is typically weaker as insurance deductibles reset, while the third and fourth quarters tend to be stronger. Q4 2017 revenue was $34.9 million; Q4 net income was $2.2 million.
- Key concentration risk: Flexitouch generated 92% of revenue. The four U.S. Flexitouch patents expired in 2017, which the company says could increase competition. The company also relies on a single-source supplier for the Actitouch controller, without a qualified alternate at year-end.
- Reimbursement remains a significant risk. A restrictive Medicare local coverage determination introduced in 2015 affected coverage for some patients; management reported no significant adverse effect on Medicare fee-for-service business to date, but other payers may adopt or interpret similar criteria. Medicare appeals can take more than a year; $4.4 million of Flexitouch Medicare receivables were outstanding at year-end, including $2.7 million classified long-term.
- Other risks include payer pricing pressure, dependence on third-party suppliers, healthcare regulation and billing compliance, market adoption, competition, and the ability to scale operations. Management said cash, securities and operating cash flow should cover working capital and capital expenditures for at least the next 12 months. Purchase commitments totaled $14.6 million, expected to be received in 2018; operating lease obligations totaled $3.0 million.
- The filing reports no legal proceedings management considered likely to have a material adverse effect and no off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls under the emerging-growth-company exemption.
Important facts for investors to verify
- Whether Flexitouch growth can continue and whether the product’s 92% revenue concentration declines over time.
- Medicare and commercial payer coverage policies, denial and appeal outcomes, receivable collectability, and realized reimbursement rates.
- Competitive effects following expiration of the four U.S. Flexitouch patents and the company’s remaining intellectual-property protection.
- Whether rising operating expenses, payer price pressure and working-capital investment affect margins and cash conversion.
- Progress and commercial impact of Flexitouch Plus enhancements, and qualification of an alternate Actitouch controller supplier.
- The effect of the 2017 tax benefit on comparisons with future earnings; FY 2017 net income exceeded operating income partly because of the tax benefit.